There are many ways investors can make mistakes. And being aware of what can go wrong is the best way to avoid catastrophes occurring.

For Helen Collier-Kogtevs of Real Wealth Australia, there are three immediate risks which spring to mind:

1. Relying on low interest rates.

If you are making repayments on any type of home loan right now, then you should be happy as a clam when paying your monthly interest bill. Why? Because currently, Australians are paying some of the absolute lowest mortgage rates we’ve paid in years, if not decades.

Variable rates presently hover at around 5%, while fixed rates can be locked in at sub-5% levels. The ability to take advantage of these super-low interest rates is an opportunity that many investors are using to their advantage, in order to qualify for larger loans and be able to pay off their mortgage debts more quickly.

However, one potential risk for investors in the current market is that they may be too reliant on these incredibly low interest rates, without taking into account the fact that they are historically low and will likely rise at some point.

The fact is, interest rates are at all-time low levels and eventually they will increase to the historically ‘average’ mortgage interest rate of around 7.5% to 8%. If you’re paying 5% now, that’s a huge jump of more than 50% on your current repayments. Therefore, if you rely on current interest rates staying in place for the long term, you could end up financially overextended.

My advice is to enjoy interest rates while they are low now, but also factor in rates of up to 8% and even 9% to ‘stress test’ your loans, to see how you’d cope with higher rates in place. This will help you to ensure you can afford your investment property now and in the future. Also, having a buffer in place will help you to ride out any financial turbulence if interest rates do start trending upwards.

2. Investing without a clear strategy.

Investing in real estate should be a positive and financially rewarding experience that ultimately lines your pockets and makes your lifestyle more comfortable. There are dozens of ways you can make money out of real estate – and therein lies the problem.

With so many potential ways to make a buck, it can be tempting for would-be investors to haphazardly employ several strategies at once. Worse still, they could have so many ‘stars in their eyes’ about the potential profits coming their way that they fail to put in place any solid strategy at all.

I’ve seen it happen dozens of times. An investors gets excited about the potential property has to transform their wealth, so they jump onto the next opportunity that presents itself – without taking into account the fact that every opportunity comes with certain risks and potential issues to be aware of.

For instance, an investor might come across an incredible development opportunity. It’s a subdivision and duplex project that, once complete, would generate several hundred thousands of dollars in instant equity. The investor sees the dollar signs and they tries to move heaven and hell to make the deal work - even though they can’t afford to finance that type of deal; even though they have to remortgage their own home in order to fund the deposit; even though the project puts immense stress on their finances, their relationships and their ability to sleep peacefully at night, because they’re so stressed about money…

It may have been a good investment opportunity. It may have even been a great opportunity. But that doesn’t necessarily mean it was a great opportunity for you and your personal situation.

This is why it’s so important for investors to devise and implement their own personalised property investment strategy, one that matches both their immediate and long-term goals, and their present lifestyle needs.

There’s no point in living from paycheck to paycheck and sacrificing your current lifestyle, in order to financially manage your property portfolio while you create wealth for your future. There is a better way to invest – and it starts with you creating an honest picture of where you stand financially right now, and where you hope to be in five, 10, 15 and 20 years.

Without this kind of investment strategy and financial road map in place, you’re effectively gambling, as it’s impossible for you to make clear, smart investment decisions that take you towards your goal. After all, how can you reach your goals if you don’t even know what they are?

3. Buying in an overheated market.

I’ve noticed a mentality that develops among some investors, which virtually scares them into thinking that they must secure their next investment immediately, lest they risk missing out on a rare and especially profitable real estate goldmine.

I’ve seen this happen frequently in recent months, particularly in certain suburbs around major capital cities that are becoming majorly overheated. One of the immediate risks for investors is that people are increasingly paying too much for property, because they feel this urgency to buy – and as a result, some people are simply buying ‘anything’ for the sake of getting into the market.

I’ve had lengthy discussions with clients and investors in an effort to cool them off and encourage them to look at the bigger picture. I’ve even had some clients who were just so keen to get into the market in a particular area that they temporarily lost sight of what they were trying to achieve.

For instance, their investment strategy may be calling for a positively geared, two-bedroom apartment, but they’re so focused on getting into the ‘suburb of the moment’ that the supply and demand imbalance has skewed their view.

They’ve gone from seeking out a two-bedroom apartment that suits their strategy, to looking at buying anything they can get their hands on and at almost any price, because properties are routinely selling within 24 hours of hitting the market.

It’s crucial at times like these that investors remain steadfast in sticking to their buying rules, by staying focused on what they are looking for.

If you swing from a two-bedroom unit to a three-bedroom house, then back to a one-bedroom unit before viewing a two-bedroom townhouse, well, it’s fair to say your investment strategy is all over the place and it’s time to get laser focused on what you really want to achieve.

If an area is overheated, look somewhere else. There are thousands of suburbs and towns around Australia, so shift your focus, because there will always be more opportunities for you to make money from real estate.

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If "overheated" means "...people are increasingly paying too much for property", then I'll take an overheated market any day.

If buyers only ever pay fair market value, then capital growth never happens. Capital growth occurs in markets where buyers are typically paying more than what a property is worth, effectively paying “too much”. The greater the degree to which they pay "too much", the more growth occurs.

If on the other hand every buyer were to pay below market value, then we’re talking about a market experiencing negative growth. The more under market value buyers pay, the greater the degree of negative growth.

Yes, it is hard to buy into a market in which demand exceeds supply. As Helen says, stick to your strategy and persevere, don't look for easy markets.

Sceptical says on
08/10/2014 11:44:49 AM

Jeremy, I think you just encouraged folks to jump into a "Speculative Bubble" - there is a difference between paying the right price in a growing market and paying too much in a bubble. Steady and sustainable growth happens when investors pay what the asset is "worth" (even if its worth more than what another investor paid the year before), and a bubble happens when investors are paying too much. In case you need a refresher, here's a definition of a speculative bubble from Investopedia:

A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest.

The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments.

May also be referred to as a "price bubble" or "market bubble".

Steven says on
09/10/2014 07:00:44 PM

Better to buy in Hackham suburbs of Adelaide where you can get 7% rental yields, or in south Brisbane Logan areas (7.5% yields) than in Melbourne at the moment

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